Income Tax Department set to Tighten its Grip on MNCs

The Indian tax department, nowadays, seems to be on a tax collection spree. Post sending ‘Friendly notices’ to Walmart and Flipkart, the taxman has now sent notices to several Multi-national Companies (MNCs) asking them to file returns for the assessment year 2011-12 furnishing details of income they earned in India. Such MNCs, mostly based out of USA, are primarily engaged in the service sector – such as engineering services and so on; and may not even have any subsidiary or representative office in India. The issued notices have the tax department seeking details of incomes which the department claims to have escaped assessment in India.

It is difficult to say how these companies, to which notice have been sent, were selected; however, it does appear to have been based on data extracted from payments made by Indian customers.

Such notices will definitely increase the compliance burden on foreign companies which may not otherwise have any taxes due, taxes having already been deducted on their Indian income. Consequently, a transfer pricing angle will also come into the picture if the transaction was with a related party in India, such as a subsidiary.

These notices may bring more revenue to the tax department’s kitty but might also have an adverse impact on the ‘ease of doing business in India’ sentiment that is being widely promoted these days by the Government.

Foreign companies would inevitably be additionally concerned with the recent budgetary amendment that enables authorities to initiate prosecution proceedings for not filing tax returns.

These issued notices will probably bring more companies under the tax net; and AY 2011-12 may just be the starting.

Written by Shalki Bansal

Shalki Bansal is a Senior Consultant in Tax and Regulatory Services at Coinmen Consultants LLP, and has an expertise on International Taxation